J.C. Penney faces a tough road ahead as it mulls bankruptcy protection

May 15, 2020, 4:00 PM UTC

The inevitable for J.C. Penney could be approaching: After years of dwindling sales, massive debt, and customer defections, not to mention a pandemic that has idled stores, the iconic retailer has reportedly been considering filing for Chapter 11 bankruptcy protection.

The struggling 118-year-old department store said on Friday it had made a $17 million interest payment but was still considering unspecified “strategic alternatives,” which could include the bankruptcy filing. Penney had another payment due on Friday.

If the company does go the Chapter 11 route, that would give it some much needed breathing room for its umpteenth turnaround attempt; fixing its business faces long odds. Penney, at the top of the retail heap alongside Sears as recently as the 1980s, is now a chain of cluttered stores selling tired store brands or merchandise easily found elsewhere, poorly supported by a subpar e-commerce operation.

The bankruptcy filing will lower Penney’s mammoth debt, incurred in 2013 when it narrowly staved off insolvency after sales plunged 25% as a result of an ill-advised attempt to be a hipper store. It will also enable it to close about 200 of its 850 stores—and it reportedly will.

Those things will help but won’t eliminate the fact that J.C. Penney faces a far more primordial challenge well beyond getting through the COVID-19 crisis: getting customers to care again.

Over the years, it has lost its once mighty hold on shoppers. In 2019, net sales were $10.7 billion, barely more than half their high-water mark hit 13 years earlier. In the interim, there have been innumerable reinvention attempts, most notably in 2012 by onetime Apple retail guru Ron Johnson, who tried to make Penney cool and got rid of the discounts and coupons that supported the department store’s business. Sales fell more than 33% in the wake of that attempt.

All the while, many Penney shoppers went elsewhere. Some traded up to Macy’s, which is now also in grave danger, or went to stores like T.J. Maxx or Nordstrom Rack which offered better designer merchandise at lower prices. Many turned to Target for its hip but inexpensive clothes and home furnishings in stores away from malls, which Americans frequent less and less. The result is a retailer that is a shell of its former self.

It’s not hopeless. Penney is still a $10-billion-a-year retailer with a legion of shoppers that continue to go there out of habit, and it sells quality products. Here are the five main areas Penney has to fix if it hopes to make a case to shoppers it still deserves their consideration.

1. Fix store brands

Penney gets about 46% of sales from its store brands, which include apparel lines St. John’s Bay and Stafford and home goods line JCPenney Home. For decades, Penney was well ahead of rivals like Target, Kohl’s, and Macy’s in developing its store brands, establishing its first overseas sourcing office in 1959 and becoming a powerhouse in developing new brands. But nostalgia cannot sustain a business, and Penney’s brands have grown stale, too broad to really have a clear identity with shoppers. Contrast that with Target, which had the courage to dump many faded brands in recent years but quickly created several new clothing lines—notably Cat & Jack for kids—turning them into billion-dollar names within one year of launch. Private brands offer higher profit margins and give shoppers a reason to choose one store over the other. But for that to hold, shoppers have to actually want those brands.

Even with national brands, Penney is losing its luster with top names tired of its years of decline. A case in point: Last year, Levi Strauss started selling its red tab jeans at Target, its first foray into mass retail with its better jeans. Other brands like Nike have been focusing much more on their own stores.

2. E-commerce

It’s hard to believe how far ahead of Macy’s J.C. Penney once was in the e-commerce wars. In 2005, it was already a $1 billion business for Penney. The chain had long had a catalog business, which gave it a head start. But under Johnson, the e-commerce and store businesses were separated, something the digital business never quite recovered from. Marvin Ellison, now CEO at Lowe’s, spent much of his time as CEO from 2015 to 2018 struggling to bring Penney’s e-commerce up to standard but couldn’t get there. For a long time, Penney didn’t even offer basics like free in-store Wi-Fi. Its website was a mess in terms of search. And Penney offered in-store pickup of online orders well after Kohl’s did. Penney CEO Jill Soltau has said an up-to-date digital business is a top priority in her turnaround plan. At this point, that should be table stakes. According to Bloomberg Intelligence, Penney gets 19% of sales online, compared with 25% at Kohl’s and Macy’s, a damaging shortfall at a time when stores have been mostly closed. Penney has opened a lab store in Texas, but it’s not clear how quickly it could implement good ideas with its limited financial means.

3. Better stores

One of the biggest downsides to Penney’s massive debt has been its inability to invest in its stores, many of which can look like flea markets with overflowing racks that are hard to reach amid a sea of “40%-off” signs. To save money on staffing, Penney has done things like put far more inventory on the store floor so it needs fewer people to go back and forth to restock shelves.

The result is messy stores: If shoppers want that environment, they can go T.J. Maxx where they will at least get designer brands. During the Ron Johnson debacle, the one saving grace was a period of reinvestment in stores, which looked great for a while.

But at the same time, closing stores is no panacea. Penney has closed 300 stores since 2016, and its downward trajectory has only worsened because of how weak the brand is. Only 100 of Penney’s 650 mall-based stores are in quality malls, according to Green Street Advisors, a real estate research firm. “A smaller store fleet is not going to solve J.C. Penney’s core issues,” the firm wrote last month.

4. Broader merchandise mix

Penney still gets about 60% of sales from clothing and accessories, areas where there are countless and arguably better options for shoppers. The chain should consider going back to its roots when it sold a much broader variety of goods as a general discounter. (Penney, which sold things like hunting rifles in the 1970s, doubled down on fashion in the early 1980s to differentiate itself from Sears, which dominated hard goods.) But it would have to tread carefully here: The debacle with its return to selling appliances between 2016 and 2019 after three decades away from the category showed how risky it is to go up against stronger rivals (Home Depot, Lowe’s, and Best Buy in this case.)

But trotting out the same kinds of clothes year after year and offering home goods shoppers can find at a million other places is not working. Proof? The one constant bright spot this past decade for Penney has been the Sephora shops within its stores, the first of which opened in 2006. Customers are coming in to get their beauty products but clearly not spending much time shopping the rest of the store. A more exciting presentation of more interesting goods could change that.

5. Standing for something

All department stores are hurting badly right now. But at least Penney’s rivals have carved out some sort of identity and are investing in reinventing themselves. Macy’s had been investing in its best stores to beautify them, attract better vendors, and was even planning a new small-store format with eateries—at least until COVID-19 wrecked its plans. Kohl’s has teamed up with Amazon to operate return centers for its online rival and has brought in a ton of new brands.

To be fair, there has been no shortage of attempts by Penney to carve out a niche. It was one of the first to see the opportunity in the plus-size market for women. But so many of its efforts are haphazard or are not well supported with marketing. Its loyalty program is rudimentary compared with those at rivals like Kohl’s and Macy’s, not to mention Ulta Beauty and Target.

There isn’t anything Penney sells that shoppers can’t easily find elsewhere, and that will be job number No. 1 for Soltau as she moves to save Penney yet again.

Read More

Great ResignationInflationSupply ChainsLeadership